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The Euro is getting crushed today versus all major currencies on worries that European policy makers are stalling on attempts to resolve the Euro Region’s sovereign debt and banking crises. The single-currency is posting a huge loss on the news that the Spanish recession is going to extend into 2013. This announcement helped raise the risk of holding Spanish debt, driving interest rates to over 7%.
The cost to borrow increased for Spain even as European finance ministers approved an aid package worth as much as 100 billion Euros. The rise in borrowing costs suggests that investors fear that this amount may not be enough to stem a financial disaster.
The negativity in the market today could be reflecting the thought that Spain will end up like Greece which needed a sovereign bailout to prevent a financial disaster for the Euro Zone.
Last week the EUR/USD bottomed on the thought that a collection of central banks would bank together to provide additional stimulus to boost their country’s economy. These entities included the European Central Bank, the U.S. Federal Reserve and the central bank of China. The idea of additional stimulus helped drive down the U.S. Dollar rather than drive up the Euro.
The currency pair rallied throughout the week as shorts continued to cover, but the main trend remained down. Based on the chart pattern, it appeared that the shorts were willing to continue to let traders believe that a bottom was forming, but in reality the long-term fundamentals remained too bearish to overcome.
Technically, the EUR/USD remains in a downtrend because of the clearly defined lower-top, lower-bottom formation. The current swing top moves from 1.2747 to 1.2324. A trade through this level will turn the main trend to up. Downside momentum suggests that the market is likely to be under 1.2000 by the end of July and could trade as low as the June 2010 bottom at 1.1876.
Last week’s rally in the Euro versus the dollar is clear evidence that the currency pair will be sensitive to stimulus measures by the Fed, but that this stimulus will weaken the dollar and not actually create a buying opportunity in the Euro. The fundamentals are too weak for the Euro to mount a strong rally. Look for shorts to cover periodically to alleviate oversold conditions, but for them to use these opportunities to refresh their bearish positions.